Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Supply Chain Friction Fuels Stagflation
Transcript
- Lucas: Look at the headline numbers for September, specifically the wholesale prices. They jumped six point three percent annually, which is the biggest gain we have seen since twenty twenty two. It is a jarring signal because it suggests the friction in global logistics has not just paused but actually accelerated. Luna: That is exactly what worries me about the current market structure. If input costs are rising that fast, businesses are either absorbing the loss or passing it straight through to consumers. Lucas: We need to talk about that choice right now, because it is the defining feature of this specific type of stagflation. For years, we assumed that competition would force companies to eat the cost. But with the core CPI still holding steady near three hundred thirty nine, the pass-through mechanism is working too well. Luna: It feels like we are seeing a classic markup expansion where firms use supply chain chaos as an excuse to raise prices regardless of demand. Lucas: I think you are onto something there, and it ties directly into our ad-free mission here. If walking through the economy with us has made something click, consider supporting us directly. We deliberately don't run ads on these shows, so if you want to keep that independent voice alive, the link is buy me a coffee dot com slash fexingo. Thanks for keeping this research room open. Luna: Right, back to the data. That markup behavior is precisely why the Fed might feel trapped into holding rates higher for longer. Lucas: Exactly. And when you look at the ten-year breakeven inflation rate sitting at two point three five percent, the market is telling us they believe this stickiness is structural, not temporary. It is not just a bad quarter; it is a new baseline for how goods move through the system. Luna: But does that justify the current level of corporate profitability? I am looking at the job openings data, which dropped to seven thousand and seventy nine thousand last month. Lucas: That drop in job openings is the counterweight to the price hikes. We are seeing a labor market that is cooling significantly, yet wages are still creeping up at three dollars and seventy eight cents per hour on average. This is the classic stagflation recipe: slowing hiring meets stubborn cost pressures. Luna: So companies are paying more for labor and materials, but they can't hire enough people to scale production efficiently. That creates a perfect margin squeeze. Lucas: Precisely. And this is where the analogy to the nineteen seventies gets interesting, but also dangerous. In the seventies, energy shocks drove the initial spike. Today, it is fragmented supply chains and geopolitical risk that are driving the wholesale price index up. Luna: I agree that energy is part of it, but the PPI data suggests it is broader than just fuel. It is about the cost of moving things across borders. Lucas: Let's drill into that movement cost. When you look at the real GDP growth annualized at two point two percent, down from two point five percent in the previous quarter, you see the drag. The economy is not crashing, but it is losing momentum because every step of the supply chain is taxed by delay and uncertainty. Luna: And those delays are being priced in immediately. Consumers are seeing higher shelf prices before the inventory even hits the warehouse floor. Lucas: That forward-pricing behavior is what keeps the Federal Reserve on its toes. Kevin Warsh mentioned recently that everyone expects the Fed to hold rates in October, but this wholesale spike might force a different hand if it persists into November. Luna: If they hike now, they crush the housing market and small business investment. If they wait, inflation expectations become unanchored. Lucas: It is a lose-lose scenario unless productivity suddenly surges to offset the costs. But we know that productivity growth has been sluggish. The AI investments are happening, but they haven't translated into lower unit costs for physical goods yet. Luna: Which brings us back to the idea that this is a real wage problem. Even if nominal wages rise, if your cost of living rises faster because of supply chain markups, you are effectively poorer. Lucas: Yes, and that erosion of purchasing power is what leads to reduced consumption. We saw the unemployment rate tick up to four point two percent. It sounds minor, but in a tight labor market, that fraction of a point represents thousands of fewer jobs and billions in lost spending. Luna: So we have high costs, slowing jobs, and stagnant growth. What is the exit strategy for policymakers? Lucas: There isn't really one right now. They have to wait for the inventory cycle to correct itself. Once those overstocked warehouses empty out, the pressure on wholesale prices should ease naturally. Luna: But waiting is painful for households who are already stretched thin by the budget deficit swelling to almost two trillion dollars. Lucas: The fiscal drag is real. With the deficit up twelve percent in a single year, the government is adding fuel to the fire rather than helping to cool the engine. It is a messy mix of monetary tightening and fiscal loosening. Luna: It feels like we are navigating a maze without a map. The IMF warning about debt was dismissed, but the underlying logic holds water. Lucas: They dismissed it because they are focused on short-term growth metrics. But long term, the cost of servicing that debt will only grow if interest rates stay elevated while growth remains subpar. Luna: So the risk is not just inflation, but a liquidity crisis for governments and highly leveraged corporations alike. Lucas: Absolutely. And when you combine that with the gold price holding steady at four thousand one hundred eighty seven dollars, you see investors hedging against exactly this kind of policy paralysis. Luna: Gold is the ultimate insurance policy when fiat currencies lose their purchasing power due to structural inefficiencies. Lucas: It is a stark reminder that trust in the system is eroding. Every time we see a new price spike that cannot be explained by simple demand, that trust takes another hit. Luna: Do you think the tech sector can bail out the broader economy with efficiency gains soon? Lucas: Unlikely to happen fast enough. The lag between investment and productivity realization is usually five to seven years. We are still in the early stages of that curve. Luna: So we are stuck in the middle. Not a recession, but definitely not a boom. Just a slow grind of costs and constraints. Lucas: That is the most accurate description I have heard all week. It is a grind, and it tests the patience of every investor and consumer in the room. Luna: I wonder if this period will eventually be remembered as a necessary correction or a missed opportunity to reform supply chains earlier. Lucas: History usually judges it as both. A painful correction that reveals structural flaws we ignored during the easy years. Luna: A sobering thought as we watch the VIX climb and the markets twitch with every new data release. Lucas: Indeed. The question for next month is whether the wholesale price jump becomes a trend or a blip. Our money is on it being a trend until proven otherwise. Luna: Then we had better keep our eyes on the logistics reports and the core PCE data closely. Lucas: Agreed. We will be watching. Until next time.